Revamping India's Carbon Credit System: The Missing Link in Decarbonizing the Energy Sector"

Author: CA CS Funnisha Garg

Abstract: India's clean energy ambitions are commendable, with a net-zero goal set for 2070. While the nation leads in renewable initiatives and energy efficiency measures, its carbon credit market remains an underleveraged tool. This article examines the existing gaps in India’s carbon credit system and proposes reforms to catalyze investment, innovation, and accountability in emission reduction.

Introduction

India, the third-largest energy consumer globally, has pledged to reach net-zero emissions by 2070. As the energy sector remains the largest contributor to carbon emissions—with over 70% of electricity generated from coal—a robust carbon credit system is pivotal. A structured market can incentivize emission reductions, promote clean energy, and attract climate finance.

Why Carbon Credits Matter in India’s Energy Transition

Carbon credits serve as a market-based tool that rewards emission reductions. For each tonne of CO₂ reduced or removed, one carbon credit is issued. These credits can be traded domestically or internationally, enabling:

• Encouragement for industries to adopt renewable energy
• Recognition and reward for early adopters of decarbonization
• Attraction of climate finance from global investors
• Development of climate-resilient infrastructure, particularly in rural areas

Current Challenges in India's Carbon Market

• Voluntary Nature: India's carbon market is largely voluntary, shaped by international mechanisms such as the Clean Development Mechanism (CDM).
• Lack of Standardization: Absence of uniform Monitoring, Reporting & Verification (MRV) systems compromises project credibility and investor confidence.
• No Domestic Compliance Market: Unlike the EU Emissions Trading System or California’s Cap-and-Trade, India lacks a legally binding, sector-specific compliance market.

Key Reforms Required

1. Digital MRV Systems: Leveraging blockchain, IoT, and AI for real-time data can enhance transparency and reduce verification costs. Chile’s energy sector, for instance, witnessed a 40% reduction in verification time through blockchain MRV.
2. National Carbon Registry: A centralized registry under the Bureau of Energy Efficiency (BEE) to track issuance, ownership, and trading of carbon credits is essential.
3. Sector-Specific Compliance Markets: Introducing emission caps for high-emission sectors (e.g., thermal power) can create demand for credits from low-emission projects.

4. Green Finance Integration: Integrate carbon credits with green bonds, ESG funds, and sovereign green securities to mobilize institutional capital.

Unlocking the Energy Sector's Potential

• • Power Producers: Carbon pricing will render coal-based electricity less viable, expediting transition to solar, wind, and hydro.
  • DISCOMs & Utilities: Incentivizing smart metering, energy storage, and distribution efficiency can generate carbon revenue.
  • Startups & Innovators: Clean tech startups in EV infrastructure, carbon capture, and biogas can monetize their carbon savings.

Global Best Practices India Can Learn From

Policy Case Studies

1. Biogas Plants as Rural Revenue Generators: A 1 MW biogas plant earns approx.

₹25 lakh/year in carbon credits, supplying power, fertilizer, and a tradable asset. These should be included under Priority Sector Lending and linked with MNRE schemes.

2. Blockchain MRV for Cost Reduction: Manual audits cost ₹5–10 lakh annually. Blockchain-based MRV reduces costs by up to 60%, attracts foreign investment, and enhances transparency.
3. Remote Verification via Satellites: ISRO’s satellites can support MRV for rural afforestation, organic farming, and biomass projects—democratizing carbon market access.
4. Tokenizing Carbon Credits: Introducing a ‘Bharat Carbon Coin’ backed by verified credits, integrated with UPI or CBDC, can unlock mass participation and enhance liquidity.
5. Carbon Revenue for DISCOMs: DISCOMs face annual losses exceeding ₹90,000 crore. Verified carbon reductions via smart infrastructure can offset these losses without increasing tariffs.

Conclusion

A reformed carbon credit system can transform India’s decarbonization journey, enabling innovation, rural development, and financial viability across sectors. By adopting digital MRV, establishing a national registry, and integrating with green finance, India can transition from coal to carbon coins—building a greener and more equitable economy.